Bloomberg News

Nexen Approval Paves Way for More Foreign Deals in Gas

December 10, 2012

Nexen, Progress Approvals Pave Way for Gas Deals, Cap Oil Sands

Canadian Prime Minister Stephen Harper approved China-owned Cnooc’s Ltd.’s $15.1 billion bid for Nexen Inc. on Dec. 7. Photographer: Nelson Ching/Bloomberg

Canada’s approval of two Asian takeovers valued at $20 billion may spark more foreign acquisitions of natural gas producers in the country while capping state-owned control of Alberta’s oil sands.

Canadian Prime Minister Stephen Harper approved China-owned Cnooc’s Ltd.’s $15.1 billion bid for Nexen Inc. (NXY) and a C$5.2 billion ($5.27 billion) offer for Progress Energy Resources Corp. (PRQ) by Petroliam Nasional Bhd, Malaysia’s state-owned energy company, on Dec. 7. At the same time, Harper unveiled foreign investment guidelines to prevent future takeovers of oil-sands companies by state-owned companies, except under “exceptional circumstances.”

“Canada is open for business but it’s not going to be a garage sale,” Robert Cooper, an analyst at Haywood Securities Inc., said by phone from Calgary. Cooper highlighted Painted Pony Petroleum Ltd. (PPY) and Tourmaline Oil Corp. (TOU) as takeover candidates in the gas sector. “If I was a betting man and that’s where you were in the markets, those names will catch a bid.”

The two takeovers tested Harper’s ability to balance the need to bolster economic relations with Asian economies without letting them gain too much influence over the world’s third- largest pool of proven oil reserves.

Joint Ventures

Harper, who has appealed to Asian investors to help develop Canada’s resources, didn’t preclude takeovers in the nation’s gas industry from companies controlled by foreign governments. Minority stakes and joint ventures in all Canadian businesses will still to be welcomed.

“When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments,” Harper told reporters. Under the guidelines, the government will strengthen scrutiny of state-owned bids for companies outside the oil sands, assessing the control they would have on the target and its industry.

Nexen, based in Calgary, rallied 15 percent to $26.97 at 9:34 a.m. in New York, 1.9 percent below Cnooc’s $27.50 offer. The Canadian dollar rose 0.1 percent to 98.76 cents per U.S. dollar. Cnooc’s Hong Kong-traded shares advanced 1.1 percent to HK$16.78 today.

Canada’s Biggest

The Cnooc-Nexen transaction is the biggest in Canada since Suncor Energy Inc. (SU) bought Petro-Canada in August 2009 for about $18 billion. Through its C$2.1 billion acquisition of Opti Canada Ltd. last year, Cnooc already owns 35 percent of the Long Lake oil-sands project operated by Nexen. It would gain Nexen’s 20 percent interest in the Usan offshore Nigerian project operated by a unit of Total SA.

The oil-sands restrictions may cause a sell-off in oil- sands companies, said Kevin Kaiser, energy analyst at Hedgeye Risk Management, an independent investment research firm based in New Haven, Connecticut. Canada’s three largest oil-sands companies by market value are Suncor, Imperial Oil Ltd. and Canadian Natural Resources Ltd., all based in Calgary. Imperial Oil is about 70 percent-owned by Exxon Mobil Corp., based in Irving, Texas.

“Harper is explicit that you won’t see a corporate takeover in the oil sands. Not by a state-owned enterprise,” Kaiser said by phone on Dec. 7. “Oil sands are going to be lower on Monday. MEG Energy Corp. (MEG) will plummet. Cnooc has a stake and investors were thinking that at some point, China would take out MEG. That is wiped clean off the table now.”

Merger Acceleration

A telephone message and e-mail left with Brad Bellows, a spokesman for MEG, outside of regular business hours, wasn’t immediately returned.

MEG fell 2.7 percent to C$33.79 at 9:53 a.m. in Toronto.

The sheer “magnitude of the oil sands resource” explains Harper’s new rules, said Ryan Bushell, who helps manage C$2 billion at Leon Frazer & Associates Inc. in Toronto.

Oil-sands production is controlled by about 15 companies that represent a “huge portion” of the country’s oil industry and 60 percent of global oil output that’s “not in state hands,” Harper said.

The gas industry won’t face such explicit limits under the new guidelines. With surging Asian demand for natural gas and a narrow window for projects due to competition from the U.S., Australia and the Middle East, foreign buyers must act, Eric Nuttall, a fund manager at Sprott Asset Management Inc, said by phone from Toronto.

“There should be an acceleration, imminently, of merger and acquisition activity,” among gas companies, said Nuttall, who oversees C$110 million in assets, including Painted Pony, a likely target, he said.

Shale Rock

Choosy foreign energy companies will limit the number of Canadian gas producers to get bids, Bushell said. “It’s a short list of buyers and those buyers are very savvy and they’re probably looking at a short list of assets,” he said.

The takeover of Progress by Petronas, as Petroliam Nasional is known, helps speed exports of Canadian gas to markets outside North America, said Michael Culbert, chief executive officer of Progress.

“Really what this does for Progress Energy and for the Canadian natural gas sector is it’s a material infusion of capital that allows us to accelerate the growth of our Canadian assets,” Culbert said in an phone interview Dec. 7.

Petronas expects to complete the acquisition by Dec. 12, the company said in a statement on its website dated Dec. 9. Progress rose 14 percent to C$21.97 in Toronto, just less than the C$22 share offer.

Gas Isolated

A glut in North American gas output from shale-rock formations caused the price of gas to reach a 10-year low in April, prompting energy companies to propose liquefying the gas by cooling it to reduce the volume and ship it by tanker to higher priced markets.

British Columbia’s natural gas is isolated from the main North American markets and closer to the Pacific coast ports of Kitimat and Prince Rupert, making liquefied natural gas exports one of the few options for monetizing the fuel. Petronas is planning an export facility worth C$9 billion to C$11 billion, joining rivals such as Royal Dutch Shell Plc and Exxon Mobil proposing LNG terminals.

LNG interest is driven by demand in Asia, where Chinese consumption of the fuel has increased an average of about 16 percent annually from 2000 to 2010 and will continue expanding as much as 12 percent a year through 2020, according to Bloomberg New Energy Finance estimates. Japan and South Korea are the world’s top LNG importers.

Chevron, ONGC

Companies looking for Canadian gas assets and LNG projects may include Chevron Corp. (CVX:US), India’s Oil & Natural Gas Corp Ltd. (ONGC) and China Petroleum and Chemical Corp., said Bob Schulz, a business professor at the University of Calgary who specializes in the Canadian oil and gas industry.

“What you’re going to see on the gas side is consortiums,” he said. “Those global companies are going to go incorporate somebody else’s assets to go and make the deal work on the supply side.”

Canada’s oil and gas industry has generated $42.7 billion in merger and acquisition activity this year, with Chinese, Japanese and Malaysian companies among the top acquirers, according to data compiled by Bloomberg. That has risen from $11.5 billion in 2000, of which Canadian acquirers were responsible for 78 percent of the transactions.

Global Stage

“The Canadian industry is now seen as being on the global stage,” said Greg Stringham, vice president of the Canadian Association of Petroleum Producers, in an interview from Calgary. “On natural gas there’s an opportunity for Canada, but the window of opportunity is fairly tight because you’re competing with the Middle East, with America and Australia. We need to step through that window fairly quickly.”

Petronas has the world’s largest single site producing LNG in Sarawak, Malaysia, according to its website, and also operates the world’s largest LNG carrier fleet. The Sarawak compound has begun taking LNG imports to quench domestic demand.

Recent Canadian gas transactions include Exxon’s C$2.92 billion offer for Celtic Exploration Ltd. Both Progress and Celtic drill in the Montney shale, one of Canada’s biggest proven shale-gas reserves with an estimated 49 trillion cubic feet and far from the main North American markets that are already oversupplied by shale gas from eastern and southern parts of the U.S.

Montney Shale

To make itself a more attractive takeover candidate, Painted Pony on Dec. 4 said it would acquire about 15,800 acres in the Montney Shale region to add to its existing land British Columbia. “Recent Montney-related transactions have highlighted the importance of large, contiguous Montney gas resource positions to global consolidators,” the company said at the time.

Other Canadian companies operating in British Columbia’s Montney formation include Canbriam Energy Inc., Yoho Resources Inc. (YO) and Tourmaline Oil. Canadian producers developing the province’s Horn River gas reserves include Encana Corp., Imperial Oil Ltd. and Pengrowth Energy Corp.

While natural gas companies may see an upswing in transactions, some smaller oil sands producers may struggle to find financing partners as potential investors absorb the new rules, said Tony Baldanza, partner at Fasken Martineau DuMoulin LLP with expertise in foreign investment and chairman of the law firm’s antitrust law group.

“This will cast a shadow on oil-sands investments,” he said. “It’s putting up a yellow flag, not a red flag, but it remains to be seen what those exceptional circumstances might be.”

Seeking Clarity

Alberta Premier Alison Redford welcomed Harper’s approval of the Nexen and Progress Energy takeovers and reserved judgment on the new restrictions involving state-owned investments in the oil sands.

“As owners of the oil sands resource, we believe we have a stake in the decisions that affect the development of those Resources, Redford said. ‘‘We will seek clarity on how ‘exceptional circumstances’ will be defined.’’

Canada is already the world’s sixth-largest crude producer and most of the expected increase in production in the coming years will come from the oil sands. The $1.7 trillion economy, whose biggest export is crude, relies on foreign investment to spur growth and help develop the bitumen resources in Alberta.

Investment in Canada’s oil sands, the world’s third largest with more than 170 billion barrels of recoverable reserves, will probably reach C$23 billion this year, according to the Canadian Association of Petroleum Producers.

Watching Cnooc

Smaller oil sands producers include Athabasca Oil Corp., BlackPearl Resources Inc. and Connacher Oil and Gas Ltd.

Athabasca fell 2.9 percent to C$9.95 at 9:43 a.m. in Toronto.

Potential investors will watch how successfully Cnooc is able to integrate Nexen’s far-flung assets and set up a headquarters and management structure in Calgary, said Wenran Jiang, adviser to the Alberta government on China and director of the Canada-China Energy and Environment Forum.

‘‘It’s not going to be easy and there’s no sure guarantee it will succeed,” he said. “Cnooc has limited resources in terms of how they can engage such a big venture, but again it’s a test case,” being China’s largest overseas purchase.

To contact the reporter on this story: Rebecca Penty in Calgary at rpenty@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net


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